TDS in E-commerce hurting MSMEs, IAMAI Suggests Reduction of Rate from 1 % to 0.25%

The e-commerce sector in India has implemented the recently introduced TDS via the newly introduced Section 194-O of the IT Act in the Budget 2020. IAMAI stated that it understands that it was an important move on part of the Government for better monitoring and realisation of taxation, in lines with TCS under GST. However, the Internet and Mobile Association of India (IAMAI) raised concerns that TDS on e-commerce transactions risks creating major liquidity challenges for MSMEs and need to be revised.

The association highlighted that mandatory deduction without any income threshold means that for most small-scale sellers, the 1% TDS rate proposed under section 194-O will likely exceed their Income Tax liability. IAMAI has shared with the authorities an illustration that suggests for merchants who have a turnover of up to INR 1.25 crore, the TDS under section 194-O would exceed the tax on income, resulting in an unnecessary refund position or in other words, create cash flow and working capital concerns for small businesses.

According to IAMAI, the imposition of TDS on online transactions, without similar imposition on offline transaction creates unlevel playing field for e-commerce platforms and acts as a disincentive for businesses to on board such platforms. Given the COVID related prolonged lockdown and the ongoing economic slowdown, e-commerce platforms have proven to be a crucial lifeline for businesses for survival. This is particularly critical for small scale and MSME sellers, who do not have the marketing or logistics bandwidth for wider outreach and are now using the  ecommerce   platforms to  sell  across  the  country  without  even  meeting the  retailers and  their  payments  are  only  through  banking  channels. Unfortunately, the TDS, over and above the pre-existing TCS under GST now means that any seller conducting business over e-commerce platforms have a considerable amount of their total revenues locked up under tax claims.

IAMAI suggested that forcing small businesses into prolonged tax refund claims for release of critical revenues is perhaps unwarranted under the present circumstances. Consequently, IAMAI has appealed to the Authorities to reduce the rate of TDS to 0.25% from 1%, which will help achieve the tax trail without creating the unintended cash-flow concerns.